LESSONS FROM THE PwC TAX AVOIDANCE SCANDAL: CORPORATE GOVERNANCE IN AUSTRALIA

Andrew Backhouse

ABSTRACT: This article addresses the issue of corporate governance principles and their application to partnerships in Australia in light of the PwC tax avoidance matter. The concept of corporate governance is defined as involving three separate areas including ‘hard law’, ‘hybrid law’ and ‘soft law’. The article also considers whether these corporate governance principles should be mandated for partnerships.

I Introduction

The PwC Australia tax avoidance scandal has damaged the reputation of the firm and eroded trust, with the potential for huge consequences. The so-called ‘hard law’ and ‘hybrid law’ corporate governance principles do not apply to PwC because it is a partnership – not a corporation. Some of those corporate governance principles, such as disclosure obligations, could help partnerships by making them more open and transparent.

PwC Australia has already implemented ‘soft law’ corporate governance principles through the PwC code of conduct. However, the tax avoidance scandal potentially demonstrated a failure of some of those principles. Given that PwC Australia operates on a partnership model, the matter brings attention to whether corporate governance principles should be mandated for partnerships in Australia.

II THE PwC SCANDAL

PwC Australia is a member firm of PricewaterhouseCoopers International Limited and operates as part of a global network. It is a large accounting firm and professional services provider that operates on a partnership model.150 The PwC Australia tax avoidance scandal began when the Federal Government started developing the Combating Multinational AntiAvoidance law and brought in former PwC Australia partner Peter Collins to help design the laws.151 As part of that process, Mr Collins signed three separate confidentiality agreements.152 During Mr Collins’ participation in consultations with Treasury, he ‘received confidential information and documentation’. It is alleged that, without prior approval from the Commonwealth, Mr Collins shared that ‘confidential information and documentation … with other PwC personnel as well as with overseas PwC partners…[who] were not authorised to receive such information.’153 A hearing by the Tax Practitioners Board later held that Mr Collins breached the Code of Professional Conduct by failing to ‘act honestly and with integrity’ and also by failing to have ‘adequate arrangements for the management of conflicts of interest that may arise in relation to the activities that you undertake in the capacity of a registered tax agent or BAS agent’.154 His registration to act as a tax agent was terminated for breaches of the Professional Conduct in the Tax Agent Services Act 2009 (Cth).155 It is alleged that PwC partners used that information to market tax schemes that would help companies avoid the government’s new tax avoidance laws.156 Treasury has referred the PwC matter to the Australian Federal Police.157 PwC Australia chief executive Kristin Stubbins has issued a public apology regarding the matter on behalf of PwC and has launched an internal investigation. Ms Stubbins cited the failures by PwC as including ‘a clear lack of respect for confidentiality’, a lack of ‘adequate processes and governance in place’ and ‘a culture… that both allowed inappropriate behaviour and [that the firm had not] … always properly held our leaders and those involved to account’.158 Her statement pointed towards a lack of good corporate governance at the firm.

150 PwC, How we are structured (Web Page) https://www.pwc.com/gx/en/about.html; (‘PwC structure’); Australian Government Business Register, ABN Lookup (Web Page) <https://abr.business.gov.au/ABN/View/52%20780%20433%20757>.

151 Andrew Backhouse, ‘PwC tax avoidance scandal gripping the finance world’, news.com.au (online, 3 June 2023) https://www.news.com.au/finance/business/pwc-tax-avoidance-scandal-gripping-the-finance-world/news-story/ 4e6bc41d1fa1640df3914d82d3bdd915; Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015 (Cth).

152 Tax Practitioners Board (Web Page) <https://www.tpb.gov.au/tax-practitioner/tax-agent/39805002> (‘TPB’).

153 Ibid.

III WHAT IS CORPORATE GOVERNANCE?

The words ‘corporate governance’ are located on the websites of many companies and organisations across Australia, often accompanied by corporate jargon about its implementation. Yet defining the phrase is a complicated task. On one level, corporate governance refers to the way corporations are ‘managed to ensure accountability’159 and how companies are ‘directed and controlled’ by boards, directors and officers.160 It also ‘encompasses the mechanisms by which companies, and those in control, are held to account’.161 In a narrow sense, it relates to the way shareholders can ensure a corporation is run in their interests.162

However, the term has also been used more generally and extended to include organisations, and how they ‘promote ethics, fairness, transparency and accountability in their relations.’163 Six key principles outlined in the Interim Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Banking Royal Commission Interim Report) included ‘obey the law, do not mislead or deceive, act fairly, provide services that are fit for purpose, deliver services with reasonable care and skill, and act in the best interest of another’.164 Commissioner Hayne also warned that ‘untrammelled corporate greed and a poor governance culture’ could negatively impact firms in Australia.165 A failure to adhere to the principles of corporate governance can have serious consequences. The Banking Royal Commission Interim Report outlined how poor governance can lead to misconduct – such as failure to implement policies or dishonesty.166 For example, the final report of the Banking Royal Commission observed that ‘poorly designed and implemented

154 2022-23 Supplementary Budget Estimates Economics Committee, Treasury Portfolio, Parliament of Australia (Question on notice no. 221 Portfolio question number: AET221, 6 March 2023).

155 TPB (n 3); Tax Agent Services Act 2009 (Cth) ss 30.10(1), 30.10(5).

156 Neil Chenoweth and Edmund Tadros, ‘The inside story of PwC’s tax scandal’, The Guardian (online, 5 March, 2023) <https://www.afr.com/companies/professional-services/the-inside-story-of-pwc-s-tax-scandal-20230504-p5d5k5.

157 Steven Kennedy, Referral to the Australian Federal Police of the PwC-Collins matter (Media release, 24 May 2023) <https://treasury.gov.au/media-release/referral-australian-federal-police-pwc-collins-matter>.

158 Kristin Stubbins, Open letter from PwC Australia acting chief executive Kristin Stubbins (Media release, 29 May 2023) https://www.pwc.com.au/media/2023/open-letter-from-pwc-australia-acting-ceo-kristin-stubbins-230529.html

159 Australian Law Dictionary (3rd ed, 2017) ‘Corporate Governance’ (def 1) (‘Corporate Governance’).

160 Klaus J. Hopt, ‘Comparative Corporate Governance: The State of the Art and International Regulation’ in Andreas M. Fleckner and Klaus J. Hopt (eds), Comparative Corporate Governance: A Functional and International Analysis (Cambridge University Press, 2013) 3, 4.

161 Phillip Lipton, Abe Herzberg and Michelle Welsh, Understanding Company Law (Thomson Reuters, 2019) 401.

162 ‘Corporate Governance’ (n 10).

163 Tobias Coutinho Parente and Cláudio Antonio Pinheiro Machado Filho ‘Corporate Social Responsibility: Perceptions of Directors in Brazil’ in Niccolo Gordini, Lerong He and James Cordeiro (eds) Management Research Review Corporate Governance (Emerald Publishing Limited, 2016) 1472, 1473.

164 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Interim Report, 28 September 2018) 85-86 (‘Banking Royal Commission Interim Report’).

165 Anil Hargovan, Michael Adams and Catherine Brown, Australian Corporate Law (LexisNexis Australia, 7th ed, 2021) remuneration arrangements’ – at least in relation to financial institutions – may lead to ‘an increase the risk of misconduct’.167

396. 400.

166 Banking Royal Commission Interim Report (n 15).

Corporate governance can be divided into three areas: ‘hard law’ obligations for directors outlined in the Corporations Act 2001 (Cth), ‘hybrid law’ such as enforced self-regulation outlined in the ASX Listing Rules, and ‘soft law’, including standards that companies or organisations voluntarily choose to adopt and follow.168 This article focuses on all three areas, with a particular focus on ‘soft law’ given that the ‘hard law’ and ‘hybrid law’ do not apply to partnerships.

Iv Justification Behind Corporate Governance

The purpose of corporate governance is to protect those who have a ‘stake in the company's success’.169 Regarding companies, the narrow interpretation of corporate governance is justified as a way to protect shareholders – to ‘ensure they get a return on investment. 170 This is accomplished by governance that follows the principles of ‘openness, integrity and accountability’.171 Regarding partnerships, the profits and losses are shared by the partners.172 This logically means that any corporate governance obligations are in place to protect the partners themselves.

Partnerships are not legal entities, meaning a firm cannot contract with third parties. Therefore, third parties must contract with one or more individual partners.173 The partners, and potentially the firm, owe obligations to contracting parties through the laws of contracts and equity.174 However, the success of a partnership often in practice relies on its good reputation in the eyes of the people they deal with and the wider community. 175 A failure of corporate governance can lead to reputational and trust damage, which in turn could harm a partnership.176

V WHY IS CORPORATE GOVERNANCE NEEDED?

The focus on corporate governance has intensified following several high-profile scandals including the collapse of HIH Insurance.177 Key findings outlined in the Report of the Royal Commission into HIH Insurance included a lack of good corporate governance. Specifically, the HIH business model was flawed and there was culture at HIH where leadership decisions were not questioned.178 The management of an organisation has an important role, ensuring that corporate governance controls are in place – and to ensure those controls are working. 179

167 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Final Report, 1 February 2019) 345.

168 Anil Hargovan, Michael Adams and Catherine Brown, Australian Corporate Law (LexisNexis Australia, 7th ed, 2021) 396.

169 HIH Royal Commission (The Failure of HIH Insurance A corporate collapse and its lessons, April 2003) Vol 1, 102 (‘Failure of HIH insurance, HIH Royal Commission’).

170 Lipton, Herzberg and Welsh (n 12) 401; Andrei Shleifer and Robert W. Vishny, ‘A Survey of Corporate Governance’ (1997) 52 (2) The Journal of Finance (New York) 737, 737.

171 Failure of HIH insurance, HIH Royal Commission (n 20)

172 Partnership Act 1891 (Qld) s 27; Re Albion Life Assurance Society (1880) 16 Ch D 83.

173 LexisNexus, Business Laws of Australia (online at 8 June, 2023) Authority to contract [24,110].

174 Ibid.

175 Petter Gottschalk, Corporate Social Responsibility, Governance And Corporate Reputation (World Scientific Publishing Company, 2011) 27

176 Monika Roth, ‘Conflict of interest: Compliance and its contribution to corporate governance in the financial services sector’ in Anne Peters and Lukas Handschin (eds), Conflict of interest in global, public and corporate governance (Cambridge University Press, 2005) 255, 255.

177 Hargovan, Adams and Brown (n 16) 393-394.

178 Failure of HIH insurance, HIH Royal Commission (n 20).

179 Ibid 107.

In particular, good corporate governance is needed to help avoid numerous issues including conflicts of interest and breaches of confidentiality.180

In the PwC tax avoidance matter, there were allegedly instances where the ‘soft law’ obligations were not adhered to by a member of members of the partnership – the issue is still being investigated by PwC and potentially by regulators. Corporate governance can arguably help a firm avoid such issues, however, there is arguably no point in having corporate governance obligations if they are not followed.

VI REPUTATION, TRUST AND RELATIONSHIPS

Allegations of business impropriety can have huge implications for a firm’s reputation – in the community, among stakeholders and clients. Professional services firms in particular are reliant on a good reputation and can suffer significantly if it is damaged. 181 Breaches of trust also have the potentially to negatively impact a firm’s reputation. This is because trust is ‘fundamental to business’.182 A firm’s reputation is based on estimations of its past actions and future prospects.183 Rebuilding a damaged reputation often relies on transparency and action. Social responsibility is linked to reputation and is related to ‘ethical behaviour’ and attempts to improve the life of the firm and the community at large.184

In her open latter, Ms Stubbins stated that in relation to the tax avoidance matter, PwC had ‘[betrayed] the trust placed in us’ and that it raised questions about PwC’s ‘integrity and trustworthiness’. She stated the firm would take action to ‘re-earn the trust of our stakeholders’ and that she was committed to ‘transparency’.185

The reputational damage is already having real-world impacts. The Australian Financial Review reported that the ‘Department of Finance effectively banned the firm from any new contracts’ due to a lack of trust and reputational issues.186 The firm won $537 million in federal government contracts over the past two years. The matter illustrates how a failure of corporate governance can damage a firm’s reputation and have major consequences. Therefore, firms such as PwC should consider placing a high priority on implementing corporate governance principles that avoid damage to reputation and trust, and that promote social responsibility, integrity and openness.

Vii Partnership Defined

A partnership is defined in all Australian jurisdictions as a ‘relation which exists between persons carrying on a business in common with a view of profit’.187 Partnerships are created by contract and there is no requirement that they be registered with the Australian Securities and Investments Commission – as companies must do.188 Liability can be unlimited or limited.189 Unlimited liability means a partner can be personally liable for the debts and obligations of a partnership.190 Limited partnerships consist of at least ‘one general partner with unlimited liability’ and at least one limited partner whose liability is limited to the capital they have contributed.191 The general partner is permitted to manage the partnership whereas limited partners cannot and are also barred from contractually binding the firm.192

180 Roth (n 27) 255, 255.

181 Gottschalk (n 26) 27.

182 Roth (n 27) 255.

183 Gottschalk (n 26) 28.

184 Ibid 35-36.

185 Stubbins (n 9).

186 Edmund Tadros, Tom McIlroy and Neil Chenoweth, ‘PwC shut out of future federal contracts’ Australian Financial Review (online, May 25, 2023) https://www.afr.com/companies/professional-services/pwc-effectively-banned-fromgovernment-contracts-20230525-p5dbde.

187 Partnership Act 1891 (Qld) s 5.

188 Hargovan, Adams and Brown (n 16) 104.

VIII THE PwC PARTNERSHIP

PwC Australia is connected to PricewaterhouseCoopers International Limited (PwCIL), an ‘English private company limited by guarantee’. PwCIL does not provide services. Instead, its role is to act as an umbrella organisation that facilitates ‘coordination between member firms in the PwC network’.193 The PwC Australia partnership was established under the laws of the Australian Capital Territory. It operates some of its professional services through incorporated companies including PricewaterhouseCoopers Consulting (Australia) Pty Limited and PricewaterhouseCoopers Securities Ltd.194 PwC Australia has historically divided its partners as being either equity or non-equity partners. It converted almost all nonequity partners to equity partners in 2022.195 PwC states on its website that its ‘liability [is] limited by a scheme approved under Professional Standards Legislation’.196 PwC – like all partnerships - is not a corporation and therefore ‘not a separate legal entity; it is the partners as a whole.’197 This means that neither the ‘hard law’ nor ‘hybrid law’ applies to PwC. However, it has chosen to implement standards that staff must follow. PwC Australia has a board made up of the CEO and 10 partners which ‘acts as an oversight body’, which is somewhat analogous to the board of a corporation.198 One of the services offered by PwC is to advise companies on how they can implement good corporate governance. PwC lists the principles of corporate governance that companies should follow as including ‘honesty, transparency, accountability, responsibility, independence, fairness and social responsibility’.199

IX THE PwC CODE OF CONDUCT

PwC has a type of ‘soft law’ corporate governance in the form of a code of conduct. The code, which was developed for PwC staff includes, ‘speak up’ which it defines as ‘speaking up when something doesn’t seem right’. The code also requires that employees act with ‘integrity and adhere to, and are guided by, the applicable professional standards’. It states employees should build trust with the community by ‘adhering to applicable laws and regulations, and fulfilling ethical obligations’. The code also relates to the use of information and states ‘confidentiality is critical to our ability to maintain the trust of our clients, each other, and those with whom we do business’. It encourages the reporting of ‘unethical or illegal behaviour’ as well as conduct that is ‘wrong, against the PwC purpose or its values.200

189 Partnership (Limited Liability) Act 1988 (Qld).

190 Hargovan, Adams and Brown (n 16) 124.

191 Ibid 141.

192 Ibid 141-142.

193 PwC structure (n 1).

194 PWC, PwC Australia Report FY22 (Web Page) <https://www.pwc.com.au/about-us/assets/firmwide-transparency-reportfy22.pdf>.

195 Ibid 16.

196 PwC structure (n 1).

197 Belgravia Nominees Pty Ltd v Lowe Pty Ltd [2015] WASCA 143.

198 PwC, PwC's Board of Partners (Web Page) <https://www.pwc.com.au/about-us/pwc-board-of-partners.html>.

199 PwC, Corporate Governance (Web Page) <https://www.pwc.com/th/en/rcs/corporate-governance.html>.

200 PwC, Living our Purpose and Values PwC’s Code of Conduct (Web Page) <https://www.pwc.com/codeofconduct>.

The PwC tax avoidance matter is illustrative of a failure to follow the PwC code of conduct in virtually all the points listed above. An internal PwC investigation is still ongoing, and facts are yet to be brought to light, but there is evidence there was a failure to ‘speak up’ when confidential information was allegedly shared by Mr Collins. A heavily redacted 144page document made public by the Tax Practitioners Board during Senate Estimates showed emails relating to potentially confidential information involving more than 50 people at PwC.201 The emails are indicative of a failure to ‘speak up’ at PwC. The alleged use of the confidential information to market tax avoidance schemes was also arguably a failure to adhere to applicable laws, regulations and ethical obligations – areas that are under investigation by PwC and potentially regulators. The Tax Practitioners Board found that Mr Collins did not ‘act with integrity’ and failed to have adequate ‘arrangements to manage conflicts of interest’.202 Whether that failure extended beyond Mr Collins at PwC has not been established. Ms Stubbins stated that the matter raised questions about PwC’s ‘integrity and trustworthiness’.203 The firm’s reaction to the scandal has faced criticism in the Australian media and by politicians. PwC initially characterised the matter as a “perception issue”. An editorial in the The Age described PwC’s reaction to the matter as ‘doggedly [refusing] to admit to anything that is not already in the public domain’.204 The characterisation of PwC’s response does not fit with its code of conduct requirement to report problematic conduct. In the Banking Royal Commission Interim Report, Commissioner Hayne warned against the characterisation of misconduct as being due to a ‘few bad apples’. He stated the attempt by an organisation to distance itself from responsibility by using such a characterisation could ‘ignore the root causes of conduct’, which ‘often lie with the systems, processes and culture cultivated by an entity. It does not contribute to rebuilding public trust…’205

X The Corporations Act

The Corporations Act imposes several corporate governance obligations on corporations including those related to ‘directors’ duties, shareholders meetings, rights and remedies, continuous and periodic disclosure obligations, the requirement of audits and regulation regarding takeovers’.206 This is the so-called ‘hard law’ of corporate governance. These obligations largely relate to investor confidence.207 These obligations are not imposed on partnerships. However, the implementation of the disclosure obligations outlined in the Act by a partnership could arguably help a partnership, by allowing it to follow the principles of openness and transparency, therefore building trust in the firm and helping to avoid reputational issues. For example, if PwC had publicly disclosed the tax avoidance matter at an earlier date, it arguably could have lessened the impact of trust and reputational damage to the partnership.

Xi Fiduciary Duties

Partners have fiduciary obligations they must follow. Arguably, the principle behind such obligations is to protect the partners from harming the partnership – and the other partners who have a stake in the firm. The fiduciary obligations owed by the partners to each other includes a duty to avoid conflicts of interest, not make secret profits, not compete with the firm, and not disclose confidential information.208 Corporate governance principles that highlight a partner’s fiduciary duties could arguably help a partnership from being harmed by a partner breaching fiduciary obligations.

201 2022-23 Supplementary Budget estimates Economics Committee, Treasury Portfolio, Parliament of Australia (Question on notice no. 243 Portfolio question number: AET243, 17 February 2023).

202 Ibid.

203 Stubbins (n 9).

204 Patrick Elligett, ‘PwC scandal demands that ethics bar be set much higher’, The Age (online, May 25, 2023) https://www.theage.com.au/business/companies/pwc-scandal-demands-that-ethics-bar-be-set-much-higher-20230525p5dbdo.html.

205 Banking Royal Commission Interim Report (n 15) 87.

206 Lipton, Herzberg and Welsh (n 12) 402.

207 Ibid.

Xii Asx Principles

In 2018, the ASX published its guide Corporate Governance Principles and Recommendations. This is the so-called ‘hybrid law’ of corporate governance. The principles relate to corporations, and specifically to listed companies. PwC is neither listed nor a corporation and therefore the principles do not apply to the partnership. However, Principle 3 could be applied to non-listed companies and partnerships. It requires that firms ‘instil a culture of acting lawfully, ethically and responsibly’. It states, ‘a listed entity should instil and continually reinforce a culture across the organisation of acting lawfully, ethically and responsibly’.209 This principle is already largely embedded in PwC’s code of conduct. Principle 6 relates to risk management and calls for organisations to ‘disclose material exposure to economics, environmental and social sustainability risks and how they are managed’.210 Implementing such a principle in a partnership’s corporate governance model could arguably assist with promoting openness and integrity – by alerting the public or a regulator to problems. Principle 2 calls for companies to appoint a majority of independent directors. The justification is to allow people from outside the firm to ‘challenge management and hold them to account’.211 Such a proposal could be considered at a partnership but there are there are also arguments against doing that – namely that partners would not want outsiders to run the firm and be privy to the organisation’s business without being personally invested in the undertaking.

Xiii Discussion On The Role Of Corportate Governance In Partnerships

There is no legal requirement that firms operating under the partnership model implement corporate governance. However, some firms such as PwC have voluntarily adopted a code of conduct. The question remains, is it time to extend the rules of corporate governance to cover large partnerships in the wake of the PwC scandal? The analysis above indicates that there is a difference between the type of corporate governance described as ‘hard law’ and ‘hybrid law’, compared to ‘soft law’. The former two fields are mainly about ensuring shareholder interests are protected and that people can be held accountable. For a partnership, there are no shareholders but instead partners who share in the profits and losses. They are likely intimately familiar with the businesses of their firm, and it could be expected that they would follow their own interests, meaning so such obligations may not be needed. However, some obligations, such as those relating to the disclosure of information, could arguably help a partnership by promoting openness and integrity and therefore help reduce reputational damage. Whether such obligations should be imposed or left to partnerships to voluntarily implement is an issue for policymakers.

208 Hargovan, Adams and Brown (n 16) 129; Helmore v Smith (1886) 35 Ch D 436 Court of Appeal (UK).

209 ASX Corporate Governance Council, Corporate Governance Principles and Recommendations 4th Edition February 2019 (Web Page) <https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-fourthedn.pdf>.

210 Ibid.

211 Ibid.

Many of the ‘soft law’ corporate governance principles outlined in this article were present in PwC’s code of conduct. The governance principles were arguably not followed in some circumstances in the tax avoidance matter, as Ms Stubbins alluded to in her open letter.212 The evidence points towards the implementation of ‘soft law’ corporate governance principles being a positive thing for partnerships, particularly regarding the issues of openness and integrity. KPMG chief executive Andrew Yates recently suggested that governance and accountability could be strengthened by codifying voluntary code into legislation.213 Whether such ‘soft law’ principles should be imposed and enforced by legislation, or left for partnerships to implement voluntarily, remains an issue for policymakers to consider.

212 Stubbins (n 9).

213 Nicole Hegarty and Nour Haydar, ‘Treasury response to PwC scandal criticised as rival KPMG proposes reforms’, ABC News (online 07, June 2023) https://www.abc.net.au/news/2023-06-07/pwc-tax-leaks-consultants-senate-inquiryquestioned/102449442.